US 10-year yield tops 5.2% for first time since 2007 on auction weakness

Such yield levels tighten financial conditions across mortgages, corporate debt and equity valuations. Analysts have said a sustained move above 5.2% would likely keep the US dollar supported while pressuring gold and risk assets. The S&P 500 continues to trade within a few percent of its record high, so further rises in real yields will test that resilience. Borrowing costs are already affected; the average 30-year US mortgage rate stands at about 7.1%, the highest in over two years. Oil has rebounded on Iran headlines, but the bond market's message is that supply and Fed policy, not energy, are now the dominant drivers.

Treasury yields are climbing on real yields and weak auction demand rather than inflation expectations, leaving the 10-year above 5.2% as markets price a likely October Fed hike.

Summary:

• On Monday, the 10-year US Treasury yield climbed above 5.2%, the highest since June 2007, and the 30-year yield hit around 5.5%, the highest since 2004.
• A senior US economist at Aberdeen stated that real yields, not inflation expectations, are driving the increase, adding that the two-year breakeven rate has barely changed this week and stays well below prior peaks.
• Markets are responding to weak demand at Treasury auctions and indications of a speeding US economy, which are boosting expectations for tighter Fed policy, the economist said.
• The seven-year auction this week recorded its poorest bid-to-cover ratio in a year, indirect demand declined, and Treasury bill auctions were also lackluster, indicating rising hesitation to take on supply.
• The market prices an October Fed hike at about 70%, with nearly 60% pricing consecutive hikes in October and December.
• Karen Ward of J.P. Morgan Asset Management expects the 10-year yield to stay below 5%, whereas ING has suggested yields could hit 6%.

Weak auction demand and expectations of tighter Fed policy have pushed the 10-year US Treasury yield above 5.2%, the highest since June 2007. The benchmark increased by about 5 basis points on Monday after a jump of more than 10 basis points last Thursday. The 30-year yield has risen to around 5.5%, the highest since 2004.

The move is being driven by real yields, not inflation expectations, according to a senior US economist at Aberdeen. The economist added that a rebound in oil prices probably did not help, but the two-year breakeven inflation rate has barely changed this week and stays well below earlier highs. Instead, markets seem to be reacting to weak demand at Treasury auctions and growing signs of an accelerating US economy, which fuel expectations of a tighter Fed policy.

The economist cited this week's seven-year auction, which had its weakest bid-to-cover ratio in a year, along with a drop in indirect demand. Demand has also been weak in T-bill auctions, and the economist noted growing investor reluctance to absorb Treasury supply, particularly as the probability of further Fed tightening rises. Pricing for an October Fed hike has reached around 70%, with close to 60% priced for back-to-back hikes in October and December.

Fed messaging has tilted the same way. Governor Lisa Cook said on Monday she expects AI investment and higher oil prices to continue driving inflation higher, and that any further rate hikes would depend on incoming data. The Fed has already started raising rates this month.

Opinions differ on how much further yields can rise. Karen Ward of J.P. Morgan Asset Management predicted the 10-year yield is unlikely to go much above 5%, as reported by the Seoul Economic Daily, while ING said yields could reach 6% soon. A Bloomberg survey of 173 market specialists revealed that just over half expect the 30-year yield to exceed 6% this year. One market analyst noted that the 10-year is sitting just below technical resistance at 5.25%, a level from July 2007, and a break above could open the way to higher levels.

Pressure is not confined to the US. Germany's 10-year Bund yield hit its highest since 2011, and UK gilt yields have also increased.

Focus now shifts to upcoming US economic data, additional Treasury auctions, and any indications from Fed officials about the likelihood of an October rate hike.